One enduring rule for covering the Federal Reserve is that you can make it complicated or you can make it simple.

In a recent conversation, Larry Summers – the former Treasury secretary who was a contender to be Fed chairman — boiled the Fed’s current situation down to three simple questions. Here are our answers.

1. How much slack remains in the U.S. economy?

Slack is the amount of unused capacity and idle labor. In a recession, there’s more; in a recovery, there’s less. The more slack, the more unemployed workers, the longer the Fed can keep rates low without fear of triggering inflationary increases in wages. When all the slack is gone, there’s likely to be more inflation than the Fed would like; so the Fed usually tries to act before that point.

Today, economists disagree about how much slack remains in the job market.

One camp argues that many who’ve been out of work for six months or more and have dropped out of the labor force are never coming back to work – and, importantly, they aren’t exerting much downward pressure on wages. This group, including Princeton’s Alan Krueger and Northwestern’s Robert Gordon, says the Fed should focus primarily the ups and downs of the short-term unemployment rate (those unemployed for less than, say, 15 weeks or perhaps less than 27 weeks.) That puts the U.S. much closer to full-employment than the headline 6.3% rate suggests.

If they’re right, then the Fed should move sooner to tap the brakes by raising interest rates.

The other camp – which, notably, includes Fed Chairman Janet Yellen — strongly disagrees. “There may be more slack in labor markets than indicated by the unemployment rate,” she said recently. “For example, the share of the workforce that is working part time but would prefer to work full time remains quite high by historical standards.”

If she is right, then the Fed should hold off on tapping the brakes because a lot of those long-term unemployed will go back to work when there are more jobs.

2. Once the economy returns to normal, say 5.5% unemployment, where should the Fed expect short-term interest rates to be?

In the recent past, the inflation-adjusted short-term interest rate has averaged around 2% in normal times. Some economists — Mr. Summers prominently among them — say that the economy may have changed. They fear the U.S economy may no longer be able to achieve full employment at a 2% inflation-adjusted interest rate.

If so, the Fed will want to aim for lower rates, perhaps an inflation-adjusted rate around 1% or even lower to achieve its mandate of maximum sustainable employment and price stability.

In their latest forecast, Fed officials foresee an inflation-adjusted interest rate of 2% when all the slack is gone. But they’re hedging. The last statement by the Fed’s policy committee said it “currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” In other words, they don’t expect to see inflation-adjusted rates at 2% anytime soon.

3. What else should the Fed take into account?

There are a few obvious candidates. One is the much discussed goal of avoiding financial crises by acting before dangerous bubbles or excesses develop. If all the Fed’s new regulatory and macro-prudential muscle proves inadequate, the Fed might someday decide to raise interest rates to head off a credit bubble even if the inflation and unemployment outlook doesn’t justify it.

Another is the elaborate game between the Fed’s monetary policy and the fiscal policy made by the president and Congress – perhaps keeping credit easy to compensate for foolishly tight fiscal policy, perhaps sometimes tightening credit to prod the other folks into action.

And then there’s the rest of the world. Indian central banker Raghuram Rajanhas been arguing that the Fed needs to pay more attention to the impact of its policies on the rest of the world.

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